Technology

Why Credit Suisse Now Loves Nokia (and Alcatel-Lucent) Over Ericsson

Chris Lange

Published: December 1, 2015 10:25 am

Last Updated: January 13, 2020 4:38 pm

The Alcatel-Lucent (NYSE: ALU) and Nokia Corp. (NYSE: NOK) merger is practically regarded as a done deal, and this combined company will be a force to be reckoned with in the space. One key analyst measures Nokia and Alcatel-Lucent up against Ericsson (NASDAQ: ERIC) and it found the combined company to be better on most fronts.

Credit Suisse has undertaken a detailed analysis of the impending Nokia/Alcatel-Lucent merger and the firm sees scope for materially higher synergies than management’s current target, as Nokia applies its operational discipline to the Alcatel-Lucent assets. Combined with a powerful IPR story, Credit Suisse believes that EBIT at the combined entity could almost double by 2018, despite a challenging spending environment. This drives an upgrade for Nokia to Outperform from Neutral and also raised the earnings estimates by 17% in 2018.

At the same time, the firm upgraded Alcatel-Lucent to Outperform from Neutral and raised its price target by about 29%. Credit Suisse believes that its estimates could be conservative. The firm sees potential for more rational pricing in the highly consolidated wireless infrastructure market. The firm also sees excessive levels of real estate at Alcatel-Lucent, which could create potential for further savings.

Applying Nokia’s discipline to Alcatel-Lucent’s wireless operations could drive gross margin upside beyond Credit Suisse’s expectations, adding as much as 7% to earnings per share on the estimates. There are saving opportunities from pruning the Alcatel-Lucent portfolio, which could provide scope for additional synergies.

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Separately, Credit Suisse lowered its estimates on Ericsson, as well as downgrading it to Underperform from Neutral, based on the analysis of global wireless capex that indicates spending will be down 3% and 4% in 2016 and 2017, which will create top-line challenges for Ericsson.

Ultimately Ericsson’s search growth may remain elusive. Credit Suisse expects:

Ericsson’s top-line will decline 2%/1% in 2016/2017 (6% below consensus). This assumes 5% decline in Networks business and 4% growth in Professional Services. It is also worth considering that Ericsson’s top-line is likely to have shrank by 6% over 2011-2015 (when adjusted for M&A, FX and hedging) during a phase when we had major LTE rollouts happening in markets accounting for ~65% of global wireless capex. This creates even more challenging prospects for topline growth if we enter into a weak capex environment.

Shares of Nokia were trading at $7.40 Tuesday morning, with a consensus analyst price target of $9.05 and a 52-week trading range of $5.71 to $8.37.

Alcatel-Lucent shares were last trading at $4.02. The consensus analyst price target is $4.69 and the 52-week range is $3.06 to $4.96.

Shares of Ericson were seen at $9.52, within a 52-week trading range of $9.06 to $13.14. The consensus price target is $11.85.

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